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Sell-Through Rate

Step-by-Step Guide to Understanding the Sell-Through Rate (Inventory KPI)

Last Updated January 13, 2024

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Sell-Through Rate

How To Calculate the Sell-Through Rate

The sell-through rate refers to how quickly a business can sell its merchandise after receiving its initial inventory.

The sell-through rate is an inventory management key performance metric (KPI) widely measured in industries such as retail and eCommerce.

By tracking the sell-through rate, a company can estimate the market demand for a certain line of products to reference in future orders from suppliers or vendors.

In practice, the sell-through rate is a KPI for tracking a company’s inventory management practices, which can be compared to historical periods for trend analysis or to a peer set of comparable companies in the same (or adjacent) industry.

Since management can distinguish between the specific products cycling through and converting into revenue quickly from those sitting idle on the shelves or a warehouse, the insights derived can guide capital allocation decisions.

In short, companies strive to reduce the number of days in which inventory is kept on hand – which can be monitored by a multitude of working capital metrics, like days inventory outstanding (DIO), inventory turnover, and the sell-through rate.

Sell-Through Rate Formula

The formula to calculate the sell-through rate divides the number of units sold by the total quantity of stock on hand at the beginning of the measured period.

Sell-Through Rate (%) = Quantity of Units Sold ÷ Quantity of Stock on Hand

Where:

  • Quantity of Units Sold → The total number of product units sold in a given period, most often a month.
  • Quantity of Stock on Hand → The quantity of stock on hand is the number of products available for sale (i.e. not inclusive of sales completed online, such as products awaiting pickup from the customers).

For a more fair “apples to apples” comparison, normally only the inventory received is included in the quantity of stock on hand.

Otherwise, there is the risk of excess inventory (i.e. obsolete inventory) that may be distorting the metric.

Unlike other inventory management metrics like the days inventory outstanding (DIO) and inventory turnover ratio, the sell-through rate (STR) is ordinarily analyzed at the product level (SKU-level), or by channel, to obtain the most practical insights for demand forecasting.

If the products are not separated for a more granular analysis, the computed STR is likely too broad for the metric to provide any useful insights on market demand.

Note: The resulting figure must be multiplied by 100 to convert the STR into a percentage.

Sell-Through Rate Calculator

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Sell-Through Rate Calculation Example

Suppose a retailer selling luxury watches to consumers is in the process of internal planning to determine the quantity of stock to order from a distributor.

Considering the product is a high-end, expensive watch, the sell-through rate can reasonably be assumed to be on the lower end, since the purchase of luxury products are not a frequent occurrence for most customers.

At the start of December 2024 (Month 1), the retailer had 200 watches on hand, of which 50 units were sold.

Beginning Inventory on Hand = 200 Watches
Quantity of Units Sold = 50 Watches

Therefore, the sell-through rate of the retailer was 25% in Month 1.

  • Sell-Through Rate (%) = 50 ÷ 200 = 25.0%

Sell-Through Rate Calculation Example

Based on that figure, the retailer decides to order 30 watches at the end of Month 1, and for the rest of the forecast period to ensure sufficient inventory is kept on hand at a manageable level.

  • New Order Purchases = 30 Watches

For products priced at higher rates, such as luxury watches, customer sales tend to be seasonal, creating the necessity for a “cushion” to meet sudden spikes in demand.

Based on historical data pertaining to stock on hand at the end of each period, the company can more accurately order an appropriate amount going forward to reduce the build-up of excess inventory.

The inventory roll-forward for the luxury watch subtracts the quantity of units sold and then adds the quantity of new units ordered.

Since December is likely the peak sales period for the year, we’ll assume a sell-through rate of 20.0% for the remainder of the forecast (Month 2 to Month 6).

The beginning inventory on hand will link to the ending balance in the prior period, while the quantity of units sold will be the sell-through rate assumption multiplied by the beginning balance.

The number of new orders, as stated earlier, will remain at 30 each month (“straight-lined”).

By the end of Month 6, the ending balance of inventory on hand is 160, which is an improvement from Month 1 that reduces unsold inventory piling up, without risking being unable to meet customer demand.

Sell-Through Rate Calculator

What is a Good Sell-Through Rate?

As a general rule of thumb, the higher the sell-through rate, the more efficient the company’s management team is at with managing inventory.

If a retailer has a high sell-through rate, that is normally indicative of high market demand or the selling essential goods (i.e. non-discretionary products) – whereas a low sell-through rate could be interpreted negatively as poor inventory management (and market demand), or pricing set too high for a niche segment of the market.

For instance, a high-end premium luxury goods retailer selling products like designer clothes and accessories at high price points should understandably anticipate a relatively long shelf life.

Why? The market for designer clothing is substantially smaller, as higher pricing corresponds to a smaller total addressable market (TAM) – all else being equal.

In contrast, a lower sell-through rate is most often perceived negatively, since that tends to be a function of misjudging the demand in the market for a certain product line (or SKU).

The industry-wide standard for the sell-through rate in the retail sector normally ranges between 60% to 80% for those selling items at lower price points.

In comparison, retailers selling products with high price tags tend to exhibit a lower sell-through rate, around 20% to 40%. While the stock is indeed kept on hand more in a longer period, that is not a negative sign per se because each item contributes more toward sales.

But an eCommerce retailer selling cheap goods, on the other hand, should expect to maintain a higher sell-through rate.

Therefore, a company will generate more free cash flow (FCF) by reducing the time between the date on which a product is available for sale to customers and the purchase date (i.e. inventory is tied up in operations).

The sell-through rate to target is contingent on various factors, namely the industry in which the company operates, but also the following:

  • Product Type (SKU)
  • Target Customer Profile (End Market)
  • Business Model
  • Product Pricing

There is one nuance, however, in that a sell-through rate close to 100% implies that the company might be too conservative in its placement of orders. In effect, customer demand could in that case outpace the supply on hand, causing less (and in particular, missed) product revenue.

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